Solutions That Leave an Impression In the Wholesale Brokerage World

1. Solutions That Leave an Impression In the Wholesale Brokerage World

2. Indexed Universal Life Insurance –A broad discussion of how companies generally Design Indexed Universal Life Insurance policies Michael Pinkans, CFA Senior Vice President – Zenith Marketing Group, Inc.

3. What We’ll Cover • History of Indexed Universal Life (IUL) • What is Indexed Life? • Regulatory environment • Indexed Life mechanics • Company Positioning/Gotcha’s • Q&A

4. History of IUL • Developed in mid-90’s as EIUL • Sales slow until 2002 • Accelerated since ‘04 • Over 30 companies • About $500 million sales (IA’s about $25B) • Why? • VUL below 0% returns? • No variable licensing • Design features – variable loans • Declining WL dividend scales and UL crediting rates • Companies with IA’s – easier transition

5. Cautions • Producers may have migrated to IUL to avoid securities licenses – “next best thing” • But, IUL is closer to fixed UL, not VUL • Goal of IUL is to “beat” current assumption UL rates by 150-200 bps long term

6. Sales Applications • Anytime CASH ACCUMULATION/DISTRIBUTION is important • Pension Max, College Funding, Personal Retirement, ROTH Alternative • Not as a term alternative – that’s the UL NLG marketplace • Not useful in an ILIT

7. What is Indexed Life? • Combines features & benefits of traditional UL but uses a different crediting method for determining interest • Interest credited is linked (in part) to movement of a stock market index over a period of time • Potential to earn interest based on increases, if any, in an equity index, while offering minimum interest rate guarantees (may be 0%, 1%, 2% or slightly higher) • Potential for higher average crediting rates than more traditional UL

8. What is Indexed Life? So: • Potential for greater cash value & death benefit than more traditional UL • More cash value protection against market declines than VUL

9. What is Indexed Life?IT IS NOT… • IT IS NOT an investment in the stock market and does not directly participate in any stock, equity or bond investments • IT IS NOT the client buying or participating directly in the index • IT IS NOT a policy where cash value is based upon performance of client selected sub-accounts (variable life) • Does NOT offer FULL Upside Potential

10. What is Indexed Life?A Middle Ground… Traditional UL Indexed Life VUL Not better… different

11. Why The Time May Be Right For IUL • Current focus on accumulation and distribution • Pricing changes to no lapse guarantee UL and term rates • Customers more comfortable with an index • Unattractive rates on current assumption UL and WL

12. Indexed UL Versus Indexed Annuities • Will be differences in how contract works • Customers must understand the guarantees in each contract • Must stronger in annuities • Lower caps and participation rates

13. Regulatory Environment NASD 05-50 • Is an Equity Indexed Annuity a Security? • Is an Indexed Life? • Depends in part on how the product is positioned, presented and sold • Some B/D’s don’t allow the sale; others have approved lists

14. Regulatory Environment Inappropriate Sales Language • Actual claims mentioned in NASD 05-50 • “What if the market goes down and you would lose nothing? The market goes up- you gain?” • “A WIN/WIN Investment vehicle!” • “Growth Potential without Market Risk.”

15. Indexed Life MechanicsInterest Crediting Potential to earn interest based in part on the movements of an index such as: • Standard & Poor's 500® Composite Stock Price Index • Dow Jones Industrial Average Index • NASDAQ-100 • Lehman US Aggregate • US Treasury Indexes • Hang SengIndex Standard & Poor’s®,” " S&P®," “S&P 500®,” “Standard & Poor’s 500,” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Security Life of Denver Insurance Company. No product is sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing any product. Hang Seng Index – An index of the largest and most liquid stocks listed on the Stock Exchange of Hong Kong. It does not reflect dividends payable on the underlying stocks.

16. Indexed Life MechanicsInterest Crediting • The index is looked at on a certain date; that is the beginning of that particular index segment period • At end of index segment period: • if index is higher, the policy owner can earn additional interest paid by the insurance company • if the index stays flat or declines, cash value is still credited with a minimum guaranteed interest rate Index Segment Period Jan 1 Dec 31

17. Indexed Life Mechanics Policy Blocks • Traditional UL premiums can occur at any time • What if indexed universal life premiums come in the middle of the index period? • Premium blocks • Portion of account value applied to a particular crediting period

18. Indexed Life MechanicsInterest Crediting • The values of an index vary daily & are not predictable • Cash value growth does not reflect dividends on the index • Cash value will likely not reflect entire increase of index

19. Indexed Life Mechanics Indexing Methods • Point to Point (Annual Reset Crediting) • Most common • Index Credit • May use one or a combination of the following crediting methods to determine amounts credited to the cash value: • Participation rate • Rate Spreads or Asset Fees • Caps

20. Indexed Life MechanicsPoint to Point Participation • Point to Point: time period over which index is being measured. • Participation: percentage that determines how much of the index’s increase is reflected in the indexed interest • Acts as one factor in determining a ceiling on crediting rate of the policy

21. Indexed Life MechanicsPoint to Point Participation • 100% Participation • Index increases 12% • Client gets 12% index interest • Subject to any other limits 100% Participation The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

22. Indexed Life MechanicsPoint to Point Participation • 100% Participation • Index decreases 1.5% • Client gets minimum guarantee Minimum Guarantee The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

23. Indexed Life MechanicsPoint to Point Participation • 50% Participation • Index increases 12% • Client gets 6% index interest • Subject to any other limits 100% Participation 50% Participation The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

24. Indexed Life Mechanics Point to Point Participation with Cap • Cap: upper limit of index increase that can be applied to the policy • Often used in conjunction with a participation rate • Establishes maximum amount of increase in the index that can be factored into index interest

25. Indexed Life Mechanics Point to Point Participation with Cap • 50% Participation • Index increases 30% • 30% increase with 50% participation is 15% • 10% Cap applied to 15% • Client gets 10% index interest • Subject to any other limits 50% Participation 10% Cap The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

26. Indexed Life Mechanics Monthly Average Index • Average of index from point "A" through point "B“ • Often monthly, but can be annual over multiple years Average Rate The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

27. Indexed Life Mechanics Which is better? Question: With 12% increase in an index, is client better off with: • A lower 50% participation rate and high 15% cap? • 50% of 12% = 6% • A high 100% participation rate and a lower 10% cap? • 100% of 12% = 12% capped @ 10% 15% Cap 50% Participation 10% Cap 100% Participation The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

28. Indexed Life MechanicsBringing it all together Year 1 – Index increases • Hypothetical example • 50% Participation rate • 12% cap • 1% minimum guarantee • Cash Value = $1,000 • Index increases 20% • 20% increase x 50% Part. Rate = 10% • End of year 1 Cash Value = $1,100 • Less any fees and charges

29. Indexed Life Mechanics Bringing it all together Year 2 – Index Decreases • Hypothetical example continued • 50% Participation rate • 12% cap • 1% minimum guarantee • Cash Value = $1,100 • Ignoring any fees and charges • Index drops 10% • 1% minimum guarantee credited to policy • End of year 2 Cash Value = $1,111 • Again, less any fees and charges

30. Other Crediting Strategies If not point-to-point then some form of averaging • Can be daily, monthly, or annual basis (multiyear) • Each day, or month, or year is a factor in the index creating value • Averaging more useful in a volatile environment • Overall point-to-point outperforms

31. Indexed Life Mechanics Illustrated Rate • Can be a set rate however it’s usually determined by looking back at past history of Index over a certain period. • Can be confusing • Does 8% always beat 7% illustrated rate?

33. 12/31 Published Date S&P 500 Historical Performance Past performance is not indicative of future performance.

34. Special Features - IULVariable or Synthetic Loan Loan amount does not reduce the Indexed Account values • Allows all indexed dollars to Participate in Performance of S&P 500 • Allows the opportunity for the S&P 500 to outperform the VLR being charged. (Loan interest is charged annually.) • Heavily marketed by some carriers • More loans = more cash value accumulation • Easy to out-illustrate the competition

35. Sales Applications • Anytime cash accumulation and/or distribution is important • Premium financing • Minimum premium to solve for 0 cash – risky • Should really overfund contract • Have a longer time horizon • Be willing to give up some guarantees for upside potential • Absolutely want some guarantees though

36. Target Customers • Generally under age 65 • Longer term time horizon • Moderate risk tolerance • Willing to assume more than UL risk but less than VUL risk • Moderate to heavy funding capability

37. Competitive Landscape Performance Drivers • Illustrated/Indexed Rate • Over 9% currently • Loan structure • Crediting strategies • Caps • Participation Rates • Multiple Indices • Guaranteed Rates • Unique Features/Benefits/Riders

38. Common Questions • If the participation rate is 100% and the cap is 12% and the index returns 25% didn’t the insurance company make a lot more money? • No, the insurance company matches assets & liabilities and buys options on the index (buying an option providing for a possible 12% payout). The seller of the option made the excess return. The insurance company made its expected return on investment – nothing more.

39. Common Questions • Is a variable/synthetic loan bad? • No, but it must be disclosed to the customer with the pros/cons. • Pros – customer bought into the indexing strategy when buying policy. Strategy may still make sense. Monies stay in indexed account. Will out illustrate any other option and probably even variable life. • Cons – Illustration always shows a “positive” spread. Actual cost of loan could be illustrated rate minus guaranteed credited rate in any given year. 8%?

40. Common Questions • There’s too many moving parts to IUL. It seems like the issuing company always has an “out” by changing caps, participation rates, etc. Isn’t it too confusing? • Since IUL is a universal life contract, there is disclosure on minimums, guarantees, etc. on the illustration. In fact there is more disclosure than a contract like whole life. In every product line (except perhaps for no lapse guarantee UL and no dividend WL), the insurance company has levers to change based on experience.

41. Common Questions • Which index is best to use? • It really depends on how the customer will think the market will act… • Linear-up point-to-point better • Volatile market averaging better • Averaging will generally credit something • Point-to-Point strategies generally better 2/3rds of the time

42. Common Questions • Why aren’t the caps and participation rates the same for a company’s IA’s and IUL contract? • Generally, caps and participation rates will be higher for IUL than for IAs because: • The guarantees are stronger on IAs (i.e. 3% on 90%) – less money to buy options • The investment horizon for IULs is longer allowing lower cost option buying • A few more percent of premium available to buy options with IUL contracts For Bramco Use Only.

43. Common Questions • Isn’t IUL the perfect product – no downside risk but upside market participation? • No, IUL is an additive product but doesn’t replace UL or VUL. It’s in between. Base guarantees lower than UL and less upside potential than VUL. This contract should never be compared to VUL – really only fixed UL as the performance will never match the unlimited upside potential of VUL.

44. Common Questions • Does the producer/customer really understand all the moving parts of IUL and the positioning of the contract? • Probably not. That’s why there’s such an opportunity for our firms – provide the unbiased advice and sell the best contract.

45. Male, 45, Pref. NS $1,000,000 Premium Solve to Endow; Pay All Years Notes: 1 - endow at age 120 2 - endow at age 100 3 - endow at age 121

46. Sample Carriers AIG Elite Global Plus IUL • Accounts – Interest based on the best-performing two out of three international indices based on a 5-year, or 1-year point-to-point term (75%/25%). • S&P 500 • Dow Jones EURO STOXX 50 • Hang Seng • Fixed loans available • Illustrates 20 year look back, 55% participation, no cap • Sweeps annually • 3% annual guarantee • Marketing – Foreign participation • Customer doesn’t know performance until after the 5th year if 5-year selected

47. Sample Carriers ANICO • Accounts • S&P 500 • Fixed & variable loans available • Illustrates at 8.25% • Sweeps 1st of every month • 2.5% annual guarantee • Marketing – CI rider; competes against “sizzle” contracts

48. Sample Carriers Lincoln Benefit Life – Ultra Index • Account • One year point-to-point based on S&P 500 • Swept 15th every month • 100% participation rate guaranteed • Fixed loans only • 0% annual guarantee but 2% guarantee on surrender or death • Illustrates at 8% (also provides avg of S&P 500 over 30 years, 15 years, plus highest and lowest one year change • Overloan protection • Marketing – strong fixed account (close to current assumption UL); full surrender charge adjustment rider

49. Sample Carriers Lincoln LifeReserve Indexed UL • Part of Mass Affluent Product Line • Disability Rider • ABR for terminal and chronic illness • Accounts • One year point-to-point • One year monthly cap • One year monthly average • Fixed and Variable loans available • Illustrates at 8% • Overloan protection • Sweeps quarterly • 1% annual guarantee • 9 year surrender • Marketing – a package sale for mass affluent

50. Sample Carriers ING – Indexed Universal Life • S&P 500 - annual point-to-point • Swept monthly on 28th • Illustrated rate 7.83% (20 year look back; 10% cap) • 3% annual guarantee • Fixed loans • Adjustable Term Rider (ATR) • Marketing – can build higher early cash value – no surrender charges in any year; refund of sales charges in the first 3 years (current basis); hypo projections – 15 high and 15 low years, premium financing.